Bank Run

Introduction

The stock market crash of October 1929 left the American public highly nervous and extremely susceptible to rumors of impending financial disaster. Consumer spending and investment began to decrease, which would in turn lead to a decline in production and employment. Another phenomenon that compounded the nation’s economic woes during the Great Depression was a wave of banking panics or “bank runs,” during which large numbers of anxious people withdrew their deposits in cash, forcing banks to liquidate loans and often leading to bank failure.

Depression and Anxiety

The Great Depression in the United States began as an ordinary recession in the summer of 1929, but became increasingly worse over the latter part of that year, continuing until 1933. At its lowest point, industrial production in the United States had declined 47 percent, real gross domestic product (GDP) had fallen 30 percent and total unemployment reached as high as 20 percent.

Did You Know?

In December 1931, New York's Bank of the United States collapsed. The bank had more than $200 million in deposits at the time, making it the largest single bank failure in American history.

In the wake of the stock market crash of October 1929, people were growing increasingly anxious about the security of their money. Wealthy people were pulling their investment assets out of the economy, and consumers overall were spending less and less money. Bankruptcies were becoming more common, and peoples’ confidence in financial institutions such as banks was being rapidly eroded. Some 650 banks failed in 1929; the number would rise to more than 1,300 the following year.

The First Bank Runs

The first of four separate banking panics began in the fall of 1930, when a bank run in Nashville, Tennessee, kicked off a wave of similar incidents throughout the Southeast. During a bank run, a large number of depositors lose confidence in the security of their bank, leading them all to withdraw their funds at once. Banks typically hold only a fraction of deposits in cash at any one time, and lend out the rest to borrowers or purchase interest-bearing assets like government securities. During a bank run, a bank must quickly liquidate loans and sell its assets (often at rock-bottom prices) to come up with the necessary cash, and the losses they suffer can threaten the bank’s solvency. The bank runs of 1930 were followed by similar banking panics in the spring and fall of 1931 and the fall of 1932. In some instances, bank runs were started simply by rumors of a bank’s inability or unwillingness to pay out funds. In December 1930, the New York Times reported that a small merchant in the Bronx went to a branch of the Bank of the United States and asked to sell his stock in the institution. When told the stock was a good investment and advised not to sell, he left the bank and began spreading rumors that the bank had refused to sell his stock. Within hours, a crowd had gathered outside the bank, and that afternoon between 2,500 and 3,500 depositors withdrew a total of $2 million in funds.

From Panic to Recovery

The last wave of bank runs continued through the winter of 1932 and into 1933. By that time, Democrat Franklin D. Roosevelt had won a landslide victory in the presidential election over the Republican incumbent, Herbert Hoover. Almost immediately after taking office in early March, Roosevelt declared a national “bank holiday,” during which all banks would be closed until they were determined to be solvent through federal inspection. In combination with the bank holiday, Roosevelt called on Congress to come up with new emergency banking legislation to further aid the ailing financial institutions of America.

On March 12, 1933, Roosevelt gave the first of what would become known as the “fireside chats,” or speeches broadcast over the radio in which he addressed the American people directly. In that first fireside chat, Roosevelt spoke of the bank crisis, explaining the logic behind his closing of all banks and stating that “Your government does not intend that the history of the past few years shall be repeated. We do not want and will not have another epidemic of bank failures.” He reassured the nation that banks would be secure when they reopened, and that people could trust that they could use their money as they saw fit at any time. “I can assure you, my friends,” Roosevelt intoned, “that it is safer to keep your money in a reopened bank than it is to keep it under the mattress.”

Roosevelt’s words and actions helped to begin the process of restoring public confidence, and when the banks reopened many depositors showed up ready to deposit their currency or gold, signaling the end of the nation’s banking crisis.